Question

Following is information in two alternative investments. The company requires an 8% return from its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1).

Project xi $(98,000) Project x2 $(156,000) Initial investment Expected net cash flows in: Year 1 Year 2 Year 3 34,000 44,500 69,500 73,500 63,500 53,500 a. Compute each project's net present value. b. Compute each project's profitability index. If the company can choose only one project, which should it choose?

Answer 1

Answer to Requirement 1:

Net Cash Flow Present Value of 1 at 8% Present Value of Net Cash Flows $ $ $ 34,000 44,500 69,500 148,000 0.9259 $ 0.8573 $ 0.7938 $ 31,481 38,150 55,169 124,800 -98,000 26,800 $ $ Project X1 Year 1 Year 2 Year 3 Totals Amount invested Net present valule Project X2 Year 1 Year 2 Year 3 Totals Amount invested Net present valule $ $ 73,500 63,500 53,500 190,500 0.9259 $ 0.8573 $ 0.7938 $ 68,054 54,439 42,468 164,961 -156,000 8,960 $ $

Answer to Requirement 2:

Profitability Index / Choose Denominator | = | Profitability Index Profitability Index Amount Invested | Choose Numerator Present Value of Cash Inflows Project X1 $ 124,800 Project X2 $ 164,961 1.27 / 1 $ $ 98,000 156,000 00 1.06 If the company can choose only one project, then it should choose Project X1